It's easy to assume that receiving a large sum of money, like an inheritance, can change your financial situation forever. But in reality, it depends on the decisions you make with that cash.
"On average, an inheritance is gone within five years of receiving it, unless it is invested in financial assets or housing equity," said Shala L. Walker, CFP.
Walker knows how fast and easy money can fly. She's worked with heirs who have received enough money to completely change their lives and instead witnessed them spend it, only coming to her after the fact.
She shared five of the worst things you can do if you inherit money.
1. Sitting on the cash long-term
There are three major risks you can run into if you sit on cash: The first is that inflation will catch up with it; the second is that you miss out on money you could have made if you'd invested your cash well; and finally, you are more prone to spending money that's laying around.
"I've actually seen that people tend to sit on the cash for a long time; they are afraid to invest it and they don't really know what to do so they don't do anything," said Walker.
Instead, Walker recommends speaking to a financial planner as soon as possible for help deciding what to do with your cash, including investing it in a diversified portfolio.
2. Buying an asset you can't maintain
One of the biggest mistakes heirs make with large sums of cash is buying an asset they can't maintain long-term, such as an expensive home.
"Overspending is the No. 1 issue," said Walker. She's seen heirs purchase homes that are outside of their price range, even spending 100% of their inheritance on the purchase, and ending up with property taxes they can't afford or homes that are expensive to furnish and maintain.
3. Holding onto an inherited property you can't afford
Not all inheritance comes in cash — some of it can be in the form of property. Walker said this kind of inheritance can be the trickiest, because heirs often have an emotional attachment to an asset they can't afford to maintain.
"On paper it increased their net worth, but they were having to use their liquid assets in order to maintain the new property. So, cash flow wise, they were house poor," said Walker.
She recommends looking carefully at the terms and conditions of an inherited asset. That includes existing leases, money owed, contracts pending, and even the time and hassle it may require to maintain the property or asset.
Walker has seen individuals who don't have the income or cash flow to maintain an inherited property keep it for sentimental reasons anyway. Many end up dipping into savings and retirement funds to pay off bills.
Her main advice: Don't assume you have to hold onto the asset.
4. Putting all your money in one place
In general, putting all your money in one place, like a single stock or piece of property, is a bad idea.
"If you are building a new portfolio, you want to make sure it is diversified even if you are considering real estate. Spread it out so you are reducing your risk," said Walker.
5. Not speaking to a financial planner
If you've inherited money or an asset of some kind, speaking with a financial planner will help you optimize your inheritance so you don't risk losing it all or ending up in a worse financial situation than you were before.
A financial planner can help you build a diversified portfolio that includes real estate or other big purchases and ensure you have the money to hold onto them for years to come.
This article was originally published in January 2021.
Correspondent, Investing
Laila is one of the most widely read reporters covering markets as an Investing Correspondent in New York.Her coverage includes stocks, fixed income, commodities, crypto, and real estate. She also profiles highly successful fund managers and traders about their strategies. She occasionally writes about system risk in the banking sector.Laila hosted Block Street, an on-camera Business Insider feature that interviews key players about the crossroads between traditional and digital markets. She has interviewed some of the sector's most prominent personalities, including Ray Dalio, Rick Rieder, David Rubenstein, and Sam Bankman-Fried.She is a mentor at Oxford University, Yale University, and Stanford University for student entrepreneurs. And has been a media judge on various panels, including for the Society of Professional Journalists.Laila can be reached at: lmaidan@businessinsider.comLinkedIn profile: https://www.linkedin.com/in/laila-maidan-63734523/
